Guernsey: Role Of The Protector – From A Guernsey Perspective

Last Updated: 11 August 2017
Article by Russell Clark

Introduction

Settlors may wish to establish a trust for any number of reasons, including asset protection, estate planning, tax mitigation or to circumvent forced heirship regimes. It may be that trusts are not recognised in the settlor's home jurisdiction and consequently he is advised to set up a trust in an unfamiliar geographical territory and to transfer the ownership of his property to relatively remote trustees with whom he has no prior relationship.

A settlor may be reluctant to make an irrevocable gift of his (often very substantial) assets to trustees who are unknown to him, especially where those trustees have broad discretionary powers and are free to ignore completely any request made by the settlor by way of letter of wishes or otherwise.

To allay his concerns, a settlor may wish to incorporate comprehensive and prescriptive terms within the trust instrument or he may wish to reserve to himself certain powers. However, either option is not without its disadvantages or risks; a rigidly drawn trust instrument would lack adaptability should unforeseen circumstances arise and the reservation of extensive powers may imperil the integrity of the trust or give rise to adverse fiscal exposure.

Protectors – a solution?

For decades, wary settlors have sought to quell their concerns by appointing someone with whom they have an established relationship as the protector.

Protectors are power-holders of varying degrees who often (but not exclusively) feature in trusts where the governing law and residence of the trustees differ from the place of residence of the settlor and the beneficiaries. Although there is a risk that the conferment of wide-ranging powers on a protector may render him a quasi-trustee, with consequent fiscal exposure, such risk may be managed by choosing a protector who is resident in a tax neutral jurisdiction.

The protector and his role

The term 'protector' is not defined in the Trusts (Guernsey) Law, 2007 (the 'Trusts Law') but such an office-holder would clearly fall within the definition of 'trust official', which means 'a person having a function or holding an office in respect of the trust other than a settlor, trustee, enforcer or beneficiary'.

The role of a protector will be determined by the powers conferred upon him by the settlor pursuant to the terms of the trust instrument. The scope of the powers bestowed will depend on the extent to which the settlor wishes to curtail the powers of the trustees – the settlor may want the trustees' powers to be subject to oversight, control or direction. Ultimately, the settlor may even wish the protector to have the power to remove the trustees and/or appoint new or additional trustees.

A protector's rights or powers can take many forms and the nature of the powers may be categorised as positive powers, negative powers or dispositive powers.

Examples of positive powers might include the power of appointment and removal of trustees or the power to direct the trustees as to investment of the assets of the trust. A protector may also be given direct administrative powers to enable the trust property to be managed.

Negative powers, or veto powers, traditionally involve the trustees' powers being made subject to the consent of the protector. If the protector's consent is not obtained, the purported exercise by the trustees will be invalid and generally it will not be possible for the exercise to be ratified nunc pro tunc, i.e. retroactively. The right to give or withhold consent may be held by the protector in a personal or a fiduciary capacity.

Dispositive powers would empower the protector to affect beneficial rights and interests in the trust property. A typical dispositive power would be the power of appointment of trust assets. Other dispositive powers would include the power of addition or removal of beneficiaries or the amendment of the terms of the trust instrument. Although it is unlikely for a protector to be given direct dispositive powers, it is common for the trustees to require the consent of the protector before they may exercise their dispositive powers.

Irrespective of the nature of powers granted to a protector, it should be borne in mind that a protector's loyalty is owed to the beneficiaries of the trust and his function is not simply to make sure that the settlor's wishes are fulfilled.

This point was addressed directly by the Royal Court of Jersey In the matter of the A Trust1 (which concerned an application to remove the protector from office) where the court identified that the protector had a 'misconceived view of himself as the living guardian and enforcer of the settlor's wishes'. The court went on to stress that 'It can be no part of the function of a protector with limited powers of the kind conferred ... by the trust instruments to ensure that a settlor's wishes are carried out any more than it is open to a settlor himself to insist on them being carried out. A trustee's duty as regards a letter of wishes is no more than to have due regard to such matters without any obligation to follow them. And a protector's duty can, correspondingly, be no higher than to do his best to see that trustees have due regard to the settlor's wishes (in whatever form they may have been imparted): from the moment of his acceptance of the office of protector his paramount duty is to the beneficiaries of the trust.'

A protector cannot refuse his consent in order to frustrate something the trustees wish to do to benefit the beneficiaries simply because the proposed course of action is inconsistent with the wishes of the settlor.

Powers in which capacity?

It is also necessary to consider whether the protector holds his or her powers in a fiduciary capacity, in which case those powers are fiduciary powers; or whether he holds them in a non-fiduciary capacity, in which case those powers are personal powers.

In the case of a fully fiduciary power, the holder 'must independently consciously consider from time to time whether or not to exercise it and he must exercise it responsibly according to the purpose for which it was conferred on him and not perversely to any expectation of the settlor, e.g. by exercising it capriciously or arbitrarily or in bad faith.'2

Insofar as personal powers are concerned, these may be further characterised as:

  • unlimited personal powers, in which case the protector may exercise his powers entirely for his own benefit and for any purpose without (in theory) being subject to the supervision or oversight of the court;
  • limited personal powers, in which the protector may exercise his powers in good faith for the benefit of a specified class of objects; or
  • partly fiduciary personal powers in which case the holder may be under a fiduciary duty to consider exercising the power but where the actual decision whether or not to exercise it is an unchallengeable personal power. A protector of a limited power or a partly fiduciary personal power must exercise the power in good faith and for the purpose for which it was conferred; if such a power is exercised in a way that is superficially within the scope of the power but is done for an unauthorised purpose it may be challenged as being a fraud on a power.

Determining which type of power one is dealing with is not always straightforward.

Although the starting point for distinguishing between personal and fiduciary powers may be to ascertain in whose interest the power may be exercised, the ultimate classification of those powers would depend on the specific circumstances of each case, the terms of the trust, the purposes for which have been conferred and the context in which they have been provided.

The distinction between fiduciary powers and personal powers is of import for a number of reasons.

The purported exercise of a fiduciary power in the protector's personal interest or in fraud on the power would be void.

A protector is permitted to release personal powers but he may not release fiduciary powers unless specifically authorised by the trust instrument.

In terms of a protector's right to indemnities, if the terms of the trust do not specifically make provision for his indemnification the distinction as to whether his powers are personal or fiduciary may be of critical concern. This point was addressed by the Royal Court of Guernsey in the case of In the matter of the K Trust3, which dealt with an application for the removal of a protector and a cross application by the protector for a blessing of the court to sanction her voluntary retirement.

The applicants' argument for the protector's removal echoed the reasoning established In the matter of the A Trust in that the poor relations between the protector and the beneficiaries was stated to be hampering the proper execution of the trust. The court heard that following the settlor's death the trust had been operated in a way that had led to the protector almost becoming a de facto trustee. The fact that the protector appeared to scrutinise every action of the trustee struck the court as being the root of the problems which had led to the application.

The protector had extensive powers which were not specified as being either fiduciary or personal. The terms of the K Trust did not make any provision for the protector's remuneration or indemnification. The protector considered that in her absence it was possible that action may be taken that would expose the beneficiaries (and former beneficiaries) to a possible tax liability. Whilst willing to step down she was concerned that to do so may expose her to personal liability. Therefore the protector sought a determination that she would be entitled to be indemnified in the event of her retirement.

Matters were complicated by an apparent inconsistency in the Trusts Law. Section 15 sets out that 'the reservation, grant or exercise of a power or interest...does not... (a) constitute the holder of the power or interest a trustee; [or] (b) subject to the terms of the trust, impose any fiduciary duty on the holder...'. Consequently, where the trust instrument provides for such powers but is silent as to whether or not the powers are held in a fiduciary capacity, they will not be fiduciary.

However, in seeming contrast, section 32 of the Trusts Law sets out that '... (2) The terms of the trust may require a trustee to consult or obtain the consent of another person before exercising any function. (3) A person shall not, by virtue of being so consulted or giving or refusing such consent (a) be deemed to be a trustee, or (b) if the terms of the trust so provide, be under any fiduciary duty to the beneficiaries or the settlor.' Consequently, it seems that negative powers are held in a fiduciary capacity unless otherwise specified in the trust instrument.

In the matter of the K Trust, the Court acknowledged the apparent contradiction in the two sections but concluded that it did not need to provide a ruling on how they should be interpreted as the trust had been established prior to the enactment of the Trusts Law. The court went on to conclude that as certain of the powers of the protector had the hallmarks of being fiduciary in nature, they should be regarded as such. This point was critical in terms of the protector's right of indemnification and the court accepted the general principle that a holder of fiduciary powers has an implied right of indemnification against costs and expenses. However, the court went on to say that the protector was not entitled to a 'blanket indemnity' which would effectively render her unaccountable for any act or omission and would leave the trustees and beneficiaries without remedy should they wish to challenge her conduct. The issue of the nature of the protector's powers, her indemnification and removal could all have been addressed quickly and cost effectively if the trust instrument had contained appropriate terms.

In other jurisdictions the courts have concluded that they had power to remove a protector from office where that protector was a fiduciary. The Royal Court of Guernsey, however, concluded that it was not necessary to find that a protector is a fiduciary in order to have the jurisdiction to remove them from office; it was sufficient for the protector to be a 'trust official' and for it to be in the interests of the beneficiaries for them to be removed.

Conclusion

Ultimately, when drafting trust instruments which include the appointment of a protector (or provisions to appoint a protector at a later date), a trust practitioner should understand clearly the settlor's objectives in order to incorporate suitable powers, the practical workability of which should be considered on a clause by clause basis. Moreover, the protector should be entitled to the information he needs in order to perform his function.

It should be made clear whether the powers conferred upon the protector are intended to be personal or fiduciary and, if personal, whether they may be exercised purely in his own interests.

In choosing a protector, the settlor should be advised to select a person who is not only suitable for the role but who is also not in a position of conflict or potential conflict.

Lastly, consideration should be given to incorporating a mechanism for the removal (and subsequent replacement) of a protector in circumstances where the protector is mentally incapacitated or is adversely affecting the administration of the trust. This has the potential to avoid lengthy and costly legal advice and possibly a court application.

Footnotes

1. [2012] JRC 169A

2. Underhill and Hayton, Law of Trusts and Trustees, Eighteenth Edition, 1.77

3. (2015), unreported,31/15 Royal Court of Guernsey

Originally published by STEP Hong Kong, July 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
24 Jan 2018, Conference, St Peter Port, Guernsey

In association with the Guernsey Training Agency, we are pleased to offer a unique, interactive event that will explore the role of integrity in the modern employment relationship, with a particular focus on the financial services sector.

15 Mar 2018, Seminar, St Peter Port, Guernsey

We are once again sponsoring C5 Fraud, Asset Tracing & Recovery which is due to take place on 15-16 March 2018 (tbc) in Geneva.

 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions